Mayer, Are Nonprofit Tax Exemptions and Deductions “Federal Financial Assistance”? Should They Be?

I have now posted the full version of my article Are Nonprofit Tax Exemptions and Deductions “Federal Financial Assistance”? Should They Be?, 29 Florida Tax Review (forthcoming 2025). Here is the abstract:

Two recent federal court decisions have reignited the debate over whether “Federal financial assistance” as used in four federal anti-discrimination statutes includes the tax benefits enjoyed by most nonprofit organizations. Both courts concluded that it does. While an appellate court reversed one decision, and the other case settled without appellate review, these holdings create significant uncertainty. And this uncertainty affects the more than 1.8 million tax-exempt nonprofits, many if not most of which do not receive federal financial assistance through other channels and so could safely conclude these statutes do not reach them, absent these decisions.

 

This Article first considers whether the two recent decisions were correct in deciding that federal financial assistance in this context includes nonprofit tax benefits and determines that the weight of authority strongly supports the conclusion that they were not. More specifically, it reviews the relevant statutory language, existing regulatory and other administrative guidance, and court decisions and commentary addressing this issue to reach the conclusion that “Federal financial assistance” as used in Title VI, Title IX, the Rehabilitation Act, and the Age Discrimination Act does not include the exemption from federal income tax enjoyed by most nonprofits and, for charities, the eligibility to receive tax deductible contributions. This Article also considers the contrary arguments asserted by courts and commentators and explains why none of those arguments are persuasive.

 

This conclusion does not end the matter, however, as those same arguments suggest that Congress should expand the reach of these anti-discrimination statutes to include nonprofits that enjoy federal tax benefits, to the extent Congress can do so within its constitutional authority. While Congress’ spending power does not support such an expansion, its taxing power could do so if Congress chose to make compliance with these statues a condition for receiving those tax benefits. Adding such a condition would not subject affected nonprofits to the procedural and penalty provisions of those statutes, but it would mean an otherwise eligible nonprofit that violated the substantive requirements of these statutes would no longer qualify for those tax benefits and could, if Congress chose, face other tax-related burdens.

 

But while Congress could exercise its taxing power to condition nonprofit tax benefits on compliance with these anti-discrimination statutes, it should not do so for several reasons. First, the likely harm to the pluralism of the nonprofit sector outweighs the benefits of requiring tax-exempt nonprofits to comply with these statutes. Second, engaging in the discrimination prohibited by these statutes does not undermine the public benefitting nature that federal tax law requires for tax-exempt charities to enjoy their tax benefits given the freedom Congress has provided to charities to define public benefit in this context. Third, the administrative burden on both tax-exempt organizations and the Internal Revenue Service of such a condition would be substantial and, for some smaller tax-exempt organizations, overwhelming.

Lloyd Mayer